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Calculation of Superannuable Profit

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From 1st April 2004, under the new GMS contract, GP’s superannuation contributions will be calculated on actual NHS profits.  This is a major change to the scheme, which will affect both GMS and PMS GP’s.  

Profit is total income less total expenses.  For the first time a practice’s expenses will now have an impact on superannuation.  It will be more important for practices to ensure expenses are controlled.  

For example, if you compare two practices, which have the same number of partners and the same earnings, under the old contract they would have paid similar superannuation contributions. If one practice is more efficient in controlling their expenses than the other, under the new GMS contract they would pay different superannuation contributions as a result of the different level of expenses.

GP’s will be required to complete and sign a form detailing the calculation of their NHS profits. Likewise with your tax return, if you are clients we will be able to complete this form for you.

The profits to be used for the calculation of superannuation are those assessed in the tax year 2004/05.  This will be based on the accounts with year-ends from 6th April 2004 to 5th April 2005.If a practice does not have a March year-end, then a pension overlap will be created.  For example a practice with a June 2004 year-end will have paid superannuation under the old contract on 9 months of income.The pension overlap will need to be deducted from your final years profits or if you change your year end.

Calculation
Step 1 - The starting point for the calculation is the individual GP’s profits, which have been declared to the Inland Revenue.  This will be the GP’s share of taxable profits after deduction of their personal expenses and capital allowances.

Some GP’s want to maximise their personal expenses claim in order to reduce the amount of tax they pay.  By doing this not only will your expenses reduce your income for tax they will also reduce your income for superannuation.  Depending on the level of superannuable profits compared to previous superannuable remuneration, this may effect a GP’s decision regarding the personal expenses they wish to claim.

Step 2 - Deduct Non- NHS income.  This will be non NHS income which is included in the taxable profits figure in step 1 e.g. income from private medical reports. It is advisable that you ensure non-NHS income can be clearly identified from your records.

Step 3 - Add Non- NHS expenses.  For most GP’s non-NHS expenses will be calculated based on the standard method.  This method calculates the non-NHS expenses based on the percentage of non-NHS income to total income.  For example if a GP’s non NHS income is 6% percent of their total income, then 6% of total expenses (including personal expenses) will be deemed to be non-NHS expenses.

For GP’s with non-NHS income exceeding £25,000 you will need to split your expenses on an actual basis.  The expenses will need to be split between those that are wholly attributable to NHS income and those that are wholly attributable to non-NHS income.  Expenses that cannot be separated will be allocated based on the standard apportionment method. Again you may need to amend your records so that non-NHS expenses can be clearly identified.

Step 4 - Deduct interest that is paid on business loans, This will be interest which is not included in the accounts, but declared separately on your tax return.

Step 5 - Add any income, which is from NHS bodies, which has not been included in the accounts and has not had superannuation paid on it.


Changes to how superannuation is paid
Under the old contract superannuation was calculated and deducted before you were paid your income.  As superannuation will be based on profits the way that your contributions are paid has also changed.

Currently the PCO are making deductions for superannuation.  It must be stressed that this is only a payment on account based on an estimate of your profits.  Once your actual profits have been calculated you may have a balance of superannuation to pay.

You should also be aware that the balance would be 20% or more if any GP’s were paying added years.  The 20% is made up of the GP’s contribution of 6% and the employer’s contribution at 14%.  The employer’s contribution was previously paid by the PCO. This income has now been included in the global sum and MPIG correction factor and therefore practices are now responsible for paying the employer’s contributions.

Practices need to ensure that provisions are made for the balance of superannuation.  It would be advisable when you receive your achievement payment for the QOF than some is put aside for superannuation.

If you would like to get an estimate of the potential balance click here to download the superannuation calculation spread sheet.

Example

A single handed GP with a year end of the 30th September 2004 has net profits of £131,835 this includes private income of £14,835.  An estimate of the potential balance can be calculated as follows:-

Net Profit per accounts131,835
Less: Non NHS income(14,835)
Estimate of superannuable profits117,000

GP’s Contribution at 6% 7,020
Employers at 14%16,380
Total superannuation due for 2004/0523,400

Less: Payments on account
GP’s at 6% (monthly £525 x 12)(6,300)   
Er’s at 14% (monthly £1225 x 12)(14,700)
Balance due   2,400